The road ahead to motor insurance reserving
Harshitta Malakar, from the IFoA’s COVID-19 ICAT General Insurance Claims Inflation group, looks at the impact of the pandemic on the frequency and severity of motor claims and the issues which reserving actuaries should consider.
The road ahead to motor insurance reserving
Covid-19 has triggered a worldwide change in business activities, government actions, societal behaviours and the general outlook for insurers’ operational environment. For motor insurers lockdowns and reduced commuter travel had an immediate effect on claims activity. Indeed, EY has predicted that the reduction in driving and claims frequency will lead to a 7.2% improvement in the UK motor insurance net combined ratio versus 2019 (2020: 93.8% vs 2019: 101%). As well as the frequency-driven improvement, there remain uncertainties for reserving actuaries such as changes in driver behaviour, new/increased sources of claims costs and changes in reporting and settlement patterns which we explore below.
It is likely that similar issues will be seen across other geographies with differences driven by the prevailing health of economies, political and legal environments and changes in policyholder behaviour.
Transport usage and driver behaviour
Covid-19 has led to changes in the level and mix of transport usage and in driving behaviour. The UK Department for Transport reported, vehicle usage reduced to 30-35% of normal levels during lockdown, and by Q3 2020 it remained below pre-pandemic levels.
As a result of reduced vehicle mileage, some insurers have provided premium rebates to policyholders or extended policy periods without additional premium. There may be increasing reputational or regulatory pressure to partially refund premium as a mechanism to pass on perceived excess profits to policyholders.
At the outset, where domestic/international airline and train travel were restricted, there was a resulting increased need for private or secondary car journeys. Now, where people do still need to travel, many have moved from public transport to making journeys by motorcycle, bicycle and foot. There is therefore an increased proportion of vulnerable road users that may be more likely to sustain critical injuries in accidents.
A common theme in studies of driving behaviour during the pandemic has been an increase in speeding violations, with other findings including evidence of more frequent harsh acceleration and braking events and increased use of mobile phones whilst driving. These behaviours have the potential to lead to more severe claims.
The reduced availability of mechanics and the scarcity of parts due to supply chain disruption has caused severity inflation and additional costs for property damage perils. For third party damage claims, insurers have also observed increased credit hire periods. The pandemic has led to additional costs of cleaning such as cost of protection kits, sanitization of vehicles and workspaces. In order to support the repair networks, insurers have allowed waivers on repair parts discounts originally offered to policyholders and offered increased perks for ‘Key Workers’ such as no-fault compensation.
Similarly, there are supply and cost pressures on medical care as scarce resources are focused on the pandemic which may increase the severity of bodily claims. Additionally, the Civil Liability Act, which was aimed at limiting the cost of bodily injury pay-outs, has been postponed once again to April 2021.
Going forward, the weaker economic environment as a result of Covid-19 could lead to a higher propensity for crime and fraud, more inexperienced and uninsured drivers on the road and increased cancellation of new car bookings due to lower affordability during recession.
Reporting and settlement patterns
Covid-19 has impacted the reporting and settlement of motor claims. Treatment delays (e.g. to regular physiotherapy) due to reduced availability of medical practitioners would have impacts on the reporting and billing of claims. Delays in court proceedings would increase legal costs and could have knock-on effects to potential litigation. Internally, disruption in insurers’ processes such as staff unavailability or operational issues could affect policy issuance, premium collection, claims assessment and recoveries from salvage and subrogation.
In contrast, claims teams may have extra capacity, due the current lower claims frequency, to accelerate the review and closure of any backlog of older claims. The pandemic crisis may also make parties more amenable to commercial settlements, in appropriate cases, to bring claims to a close more quickly.
Standard reserving methods could be materially impacted by these factors requiring actuaries to resort to bespoke calculations while keeping abreast of changing market conditions and emerging claims experience. There may be a requirement for more granular or frequent reserving including frequency-severity projections for the most recent accident periods. Care should be taken to separate the inherent characteristic of a certain peril versus that caused by the pandemic as new trends may not surface until a later stage, particularly for long-tailed classes such as Excess BI and on PPOs.
Some companies may choose to have implicit or explicit prudence in a-priori assumptions such as refraining from giving full credit to frequency drops, to e.g. long tailed large bodily injury claims, as they wait for more certainty in claims development. On severity, a prudent position may be taken by projecting severity trends from pre-Covid-19 periods and explicitly making severity uplifts based on emerging experience and market trends.
Where possible, actuaries may use market statistics to inform assumptions, factoring in more qualitative and tailored information from claims assessors, underwriters, brokers and third parties.
Actual versus expected analysis may confirm favourable experience, however a robust validation framework for reserves and business planning is required to avoid confirmation bias. Sensitivity and scenario testing will be critical to understanding an insurer’s exposure to risk including the potential for reinsurance disputes.
Motor insurers and actuaries face difficulties in determining the appropriate allowance for Covid-19 on pricing and reserving assumptions. Actuaries will need to adapt their models and assumptions to changing circumstances and must consider whether changes are temporary or are the “new normal” e.g. reduced road traffic due to the work-from-home model.
The changes require actuarial judgment to be applied and communicated clearly in order that boards have the necessary information to take informed decisions. Boards should be made aware of the key assumptions and risks and reasons why the results may materially change from the current review.